Estimation of Income under section 145 without disclosing materials relied on is invalid.

The estimation of income made by the AO without disclosing the materials relied on and also denying assessee an opportunity was not only in violation of the statutory provisions but also in violation of the principles of natural justice.

In the case M/s. Podikunju Musaliar Memorial Educational& Charitable Trust Chandanathope, Kollam Versus Commissioner of Income Tax-KERALA HIGH COURT

Search and seizure under Section 132 of the Income-tax Act has been conducted in the premises of the assessee. After completing all procedural formalities, assessments for the years 2003-04 to 2009-10 were reopened. Accordingly, the assessments were completed where, rejecting the books of accounts of the assessee and estimated the gross profit at 40% of the gross receipts and estimated the net profit at 15% of the gross receipts.

The assessee is also not eligible for setting off capital expenditure in view of the fact that the trust is not enjoying exemption either under section 11 or 10(23C) of the IT Act. Further, some of the credits balance in the balance sheet of the trust also remain unexplained. Every year the assessee has been claiming huge amounts, as capital expenditure against the collection of hospital and income from other sources.

In view of the discrepancies detected in the accounts and financial statements filed by the assessee as cited, AO proposed to invoke the provision of Section 145 and reject the books of accounts furnished by the assessee along with the returns of income filed in response to notice u/s 153A. It is, therefore, proposed to adopt the income from the activity of running the hospital and medical college carried out by the assessee trust @ 40% of the gross collection.

There is no dispute regarding rejection of books of accounts by the Assessing Officer. Further on invoking section 145, the income of the assessee can be estimated either by taking recourse to the orders pertaining to the previous assessment years or by relying on cases which are comparable in nature.

Assessment orders reveal that the assessee’s case has been compared with similar other assessees running hospitals in the same region. According to the Assessing Officer, the gross profit rate of such comparable well established hospital concerns was found to be at an average of 50 to 55% and it was on that basis, AO has proposed to assess profit at 40%. However, neither the order of the Assessing Officer, nor the orders of the appellate authorities reflect reliance on the aforesaid comparable cases.

Further, the Assessing Officer has also not afforded the assessee any opportunity to rebut those materials.The right of the assessee to have such an opportunity is statutorily recognised in Section 142(3) of the Income-tax Act and also in the judgments in Yaggina Veeraraghavulu and Mavuleti Somaraju & Co. v. Commissioner of Income-tax(1962 ITR 528), S.Sarabhaiah Setty & Sons v. Commissioner of Income-tax (1964 ITR 175) and Joseph Thomas & Bros. v. Commissioner of Income-tax (1968 ITR 796).

The estimation of income made by the Assessing Officer without disclosing materials relied on and also denying them an opportunity being heard was not only in violation of the statutory provisions, but also in violation of the principles of natural justice. For that reason, Honorable High Court cannot sustain the estimation of income made by the Assessing Officer.

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